When it comes to financial solutions that help consumers erase personal debt, debt consolidation and debt settlement are two of the most popular. However, they each have disparate functions and are used to remedy divergent issues.
Elementally, debt consolidation pares the number of creditors owed, while debt settlement shrinks the amount owed. However, each strategy can provide multiple benefits.
Let’s look closer at the difference between debt consolidation and debt settlement.
Debt Consolidation
With this strategy, you’re basically rolling multiple debts into a single payment, hopefully at a better interest rate. It particularly helps those who are having a hard time managing several bills – usually credit cards – with their varying paymentsand due dates. Consolidation streamlines all that.
You can get a consolidation loan from a bank or other financial institution, or you can consolidate through what’s known as a zero-percent balance transfer card, onto which you can shift your higher-interest credit card debt and pay it off before the promotional rate ends. A low-interest home equity loan can also be used to consolidate debt, but you must be careful here since such a loan tied to your home as collateral.
You could save cash on interest over time, but that depends on your repayment term and whether fees – application, origination, or otherwise – are involved.
Debt Settlement
You can handle this on your own or leave it to professionals. Either way, debt settlement involves getting your creditors to accept less than what you owe to resolve your debt. If you go through an agency, it will do the negotiating for you. Creditors typically go along since they understand that if you file bankruptcy – your likely next move, otherwise – they may come away with nothing.
If agreements are reached, you’ll make a series of installment payments, or, in the case of a debt resolution company such as Achieve, you’ll make a one-time payment in full for each creditor, then pay for the services. The key here is that you have cash available for settlements.
This approach suits those best who have accounts that are markedly past due, and who can’t see themselves clearing their entire debt load on their own. It also works especially well for those who wish to stay out of bankruptcy, which lives on your credit report for between seven and 10 years, depending on the type you choose.
Key Differences
Beyond what we’ve mentioned, the two approaches differ in terms of:
- Credit score impact. Consolidation may bump up your credit score – if it lowers your credit utilization ratio. The process of debt settlement could hurt your already-poor scoring – in the near term. Once your debts are settled, you can rebuild your credit.
- Cost. With debt consolidation, it depends on what kind of interest rate you qualify for, and what rates are being offered. There may also be fees involved. You’ll pay for debt settlement services, but only if they’re successful. You’ll pay nothing if you handle things on your own, but you may have less chance for the results you’re looking for.
- Advantages. Consolidation renders bill paying easier, and you might be able to save on interest. With debt settlement, you can erase obligations for less than what is owed. Also, you can avoid collections actions, including being sued, as well as bankruptcy.
- Disadvantages. It depends on how long your loan term is, but you could wind up paying more in total interest. With debt settlement, there’s the credit issue, and you may not be able to persuade negotiators. Your chances are imminently better with professional help, however.
Ultimately, the difference between debt consolidation and debt settlement is only important in terms of which one suits you and your situation best. Take a hard look at each solution, then opt for the one that will serve you well.
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